Forex trading can be overwhelming for beginners, so many experts recommend starting with naked Forex trading. Instead of looking at complex indicators, you review charts and candlestick patterns to detect trends.
So, what is naked Forex, and is it a good idea? Here is what you should know.
What Is Naked Forex Trading?
Naked Forex trading is also called price action trading. It involves looking at the current values of currency pairs instead of using indicators.
Forex indicators provide additional data for evaluating the market before entering a trade. Common Forex indicators include Bollinger bands, Fibonacci levels, relative strength index (RSI), and moving average (MA). The naked trading strategy is popular among many traders these days. For instance, it appeals to many beginner traders because it is less complex than other options. It is also popular among seasoned traders who want to avoid trading strategies that are over-complicated or overly technical.
Forex technical indicators are typically used for technical analysis, one of the two main methods used to evaluate the foreign exchange market. The other method is fundamental analysis.
The fundamental analysis reviews economic indicators, such as major news events and geopolitical changes. Technical analysis relies on charts and technical indicators. With naked Forex trading, you only review the present market and do not rely on any past or future indicators.
Decisions are made using candlesticks or charts. As naked Forex focuses only on current price action, beginners may find this form of trading more accessible. In addition, traders are not overloaded with information from technical indicators and fundamental analysis.
The Basics of Naked Forex Trading
Naked Forex requires you to look at the current price action. You pay attention to when prices rise or fall and try to determine whether the trend will continue. Some of the scenarios that you should look for include:
Uptrends occur during upward price direction. The charts include a series of higher highs or lows. Downtrends occur during the downward price direction and include a series of lower highs or lows. Consolidation occurs when the price does not have any specific pattern.
Naked traders often rely on support and resistance levels to find suitable trades, especially when the price is consolidating. Support and resistance levels come from past changes in the currency pair’s direction.
For example, a currency pair is trading at 1.15. It historically reverses course at 1.12 during downward trends, creating a support level. Conversely, it often changes course at 1.17 during upward trends, making a resistance level.
When a currency breaks away from its supports or resistance levels, traders may gain an opportunity for a successful trade. But, again, looking at charts and candlesticks helps you detect a reversal in the price before it occurs.
Price Action Trading Strategies
Naked Forex traders may use several strategies for choosing when to buy or sell a currency pair. Some of the most popular strategies include:
- Inside bars after a breakout
- Spring at support
- The harami
- The hammer
“Inside the bars after breakout” involves selling a currency pair after a breakout in anticipation of a course correction. You are selling “inside the bars” created in a candlestick pattern by the previous bar’s range.
For example, the price of a currency pair breaks out above its resistance level. After the price peaks, it may gradually settle closer to its original price. This may create the opportunity for a successful sell trade.
Spring at support occurs when the price rises after reaching its support level. Unfortunately, the sudden rise is often followed by a fall.
The harami is a candlestick pattern with an upward or downward trend that aligns with a rise or fall in the opening and closing prices. A harami typically indicates that the direction of the price is about to change.
The hammer is a candlestick pattern that resembles a hammer. It occurs when the open, close, and high prices are close while the low price is long. As with the harami, the hammer indicates a reversal of a trend.
Other common patterns include the “head and shoulders” and “wedge” patterns. The head and shoulders pattern includes lower highs between a high point. This typically indicates that the price will move downward. A wedge pattern is a triangle with prices that grow closer and closer. This typically indicates that a breakout is about to occur.
Advantages of Naked Forex Trading
Naked trading is not for everyone, but it offers several advantages:
- Naked Forex is often easier for beginners
- It limits the risk of second-guessing yourself
- It involves less of a time commitment
- It helps you learn to read the market
Naked Forex is recommended for those who are new to Forex trading. Understanding how to use technical indicators is often challenging and time-consuming. Instead of helping you make more informed decisions, the indicators may lead to information overload.
Using indicators without fully understanding how they work increases the risk of second-guessing yourself. The indicator may contradict your interpretation of the candlestick chart. Indicators may also lead to bias. For example, you may use indicators to reinforce your predictions. This increases the chances of failing to analyze the indicators correctly.
Avoiding indicators also saves time. The time you save may keep you from missing out on trade opportunities.
Naked Forex also offers a way to learn Forex trading gradually. Eliminating indicators allows you to focus on just the basics. This trading method may help you learn to read the market, choose the right trading platform, and become a more seasoned trader before adding indicators.
Disadvantages of Naked Forex Trading
While naked trading keeps you from getting overwhelmed by indicators, it also includes potential drawbacks:
- It requires practice to become consistently successful
- Automating your trades is more of a challenge
- It increases the risk of long-term trades
Naked Forex requires you to review fewer variables, but it also requires skill. You need to understand how currency prices fluctuate and what to look for to predict reversals in trends. It is an easy technique to start using. However, it does not automatically increase your chances of making successful trades.
Many trading platforms allow you to automate the conditions for every trade. You can buy or sell when specific conditions are met. Automating your trades is more of a challenge with naked Forex trading. You can enter stop conditions, but other conditions involve technical analysis.
Long-term trading is also riskier when using naked Forex trading. This method works best for short-term and medium-term trades. The small price fluctuations you trade on tend to occur during short periods instead of months or years.
Conclusion: Is Naked Forex Trading a Good Idea?
Naked Forex training may provide a good starting point for beginners. You can start trading on the foreign exchange market without spending months learning how to read technical indicators.
The simplicity of naked Forex trading can also be misleading. Understanding the basics is easy but mastering this technique requires practice.
You may not significantly increase your chances of making successful trades. You still need to take the time to understand the market and how to read candlestick charts. You need to look for small price fluctuations and find potential trade opportunities.
In the end, all Forex trading strategies include risks. To become a successful naked Forex trader, consider setting up a demo account to practice trading before risking real money.